Mr. Bartelloni, during your presentation at the meeting of CEE oil and gas associations in Sofia in March, you emphasised some of the risks for the European refining industries. What are the trends and the major hurdles for the sector?

To describe and identify the challenges affecting the EU refining industry, we should start by looking at the relevant social and economic trends on our continent.

Climate change is a global challenge for the planet. All countries signing up for COP21 in Paris pledged global action. The EU, as the recognized world leader in this area, has taken (and is planning to take) the most ambitious measures to reduce greenhouse gas emissions. This translates into regulations aimed at cutting CO2 emissions from several sectors of our economy, including petroleum refineries and transport.

Poor air quality, especially in urban agglomerates, is another challenge our society needs to address urgently. Gasoline and diesel vehicles are one of the causes of pollution, albeit not the only one and for certain pollutants not the main one.

Our continent is also a front-runner among other world regions for the efficient use of energy: the de-coupling of the European energy consumption and its GDP is beneficial to our economy and contributes to reducing GHG emissions and air pollution.

We could continue by mentioning other societal trends, but even limiting ourselves to those three – climate change, air quality and energy efficiency – the impact on the EU refining is very significant in terms of reduction in demand of petroleum products and increase in costs (both operating and investments costs).

Our industry is continuously addressing these challenges –by innovating, leveraging on its ingenuity and in cooperation with other industries and with the regulators. In a number of cases the industry had to restructure (17 refineries out of about 100 closed down in the last few years).

The following key conditions are necessary for the EU refining industry to be successful in adapting to the societal challenges:

•    Regulatory predictability. Clear, stable, long-term regulations should provide the needed confidence for investment decisions to be taken. In the petroleum refining sector, the economic life-cycle of many investments – especially the structural ones or those for new technologies – lasts for decades. The investors, most often international companies and their shareholders, have the option to invest their resources in several regions of the world: in the absence of regulatory stability in the EU, it is likely that investments will preferentially flow to other continents.

•    A competitive level playing field. Petroleum products are traded on a truly global market, with little or no barriers – whether physical or economic - to the flow of commodities (typically gasoline, diesel, jet fuel, fuel oil and other liquid products or widespread use) from one region of the world to another. For an EU refinery to be economically sustainable, it has to compete successfully on the EU domestic market with refineries from Russia, Middle East, the US and other countries. The regulatory costs of our refineries must not exceed those of competitors. But according to the Refining Fitness Check issued by the EU Commission in January 2016 they do and regulatory costs accounted for up to 25% of the loss of international competitiveness of European refineries between 2000 and 2012.

•    Competitive energy costs: as the refining industry is energy intensive, the cost of natural gas and electricity play a significant role in the economics – and therefore in the competitiveness – of every refinery. As energy for industries in the EU is more expensive than for many of our competitors, there is scope for regulations to contribute to rebalancing energy costs on our continent.

In conclusion: EU refineries are amongst the most energy- and carbon-efficient and the cleanest in the world. Moreover, they provide a very significant contribution to the EU economy and society in the form of economic value, high level jobs, security of energy supply and integration in the industrial supply chain.

So, as long as there is demand for petroleum products in EU (and there is a consensus by reputable international bodies on the fact that this will continue to occur for decades), it is of utmost importance for the sake of both the EU economy and for the global environment that these products are supplied by refineries located in the European Union.                             
     
How has the oil price slump affected refining and has the industry already felt the effect of the production cap introduced by major producing nations?

Oil price is the single most important cost component of the Profit & Loss statement for a refinery. However, the commercial margin is determined – in simple terms - by the differential in price between the main petroleum products and crude oil. Therefore, a relatively low oil price does not necessarily mean that the margin for a refiner is higher, as other “fundamentals” affect it: supply and demand of the individual products, status of the economy, level of stocks, etc.

Having said that, the refinery industry in the EU has seen an average improvement in the last two years of its margins with respect to the recent past. But volatility of the margin, uncertainty on the development of the supply and demand and the regulatory pressure are the key elements influencing the way oil companies look at the future and decide their investment strategy.            

The event in Sofia tackled heavily the issues of the gray fuels sector. What is the state of the refining industry in Europe? What are the measures to be applied for transparency, better quality of fuels and higher budgetary incomes from the fuel sector?

The scope of FuelsEurope’s activity is focused on policy at EU level. Taxation is a matter for Member States, and, as such, falls within the scope of the National Oil Industry Associations. However, at EU level FuelsEurope advocates for transparency, effective implementation and – even most importantly – consistent enforcement of regulations across all the EU territory. The latter is a key condition for preserving the EU internal market and this is one of the most important asks of our industry. 


How will tighter emissions restrictions affect the refining industry in Europe?

Greenhouse gas emissions in the refining sector (as well in the other energy intensive industrial sectors) are regulated by the Emission Trading Scheme (ETS), the revision of which is currently being debated on the Brussels policy arena. The ambitious emissions reduction target (-43% in 2030 vs. 2005) requires a declining number of “CO2 allowances” allocated to the industry. Depending on the effectiveness of the carbon leakage protection and on the cost of the CO2 allowances, the impact on the competitiveness of the EU refining industry may be very significant.

With regard to carbon leakage protection, the principle is simple: as the European Energy Intensive Industries compete on the global market, and as many of their main competitors are located in countries with less strict GHG regulations (i.e. with lower or nihil CO2 cost), a form of “protection” against so-called carbon leakage is needed.

So what’s carbon leakage? It is ultimately the relocation of manufacturing activities from the EU to countries with lower regulatory costs: the same goods will be produced abroad and imported into the EU.

The end result? A net increase in CO2 emissions (as industries in less regulated regions have higher emissions than those in the EU) and a progressive de-industrialization of Europe with resulting job losses.

So carbon leakage protection, i.e. the allocation of free allowances, must be effective:

•    It must cover 100% of the direct and indirect emissions at the level of the “best performers”, i.e. the 10% most carbon efficient installations establishing the benchmark
•    The allocation of free allowances must be based on recent actual activity levels (and not on outdated, “historical” levels)
•    The benchmarks (CO2 emissions associated with operation of the 10% best performers) must be recalculated based on actual data and should not be set to decline at unrealistically fast rates.    
•    The total number of free allowances available for carbon leakage protection must be sufficient to protect all the industries qualifying as exposed to carbon leakage, and the application of the so-called “cross sectoral correction factor” must be avoided.

Moreover, the possibility to surrender international offsets must be allowed, where these offer real sustainable emission reductions and are subject to robust monitoring, reporting and verification protocols. This would promote global participation and achieve the lowest cost of carbon abatement.

Under these conditions, EU refineries will evolve, through further improved energy efficiency, process innovation and the adoption of new technologies, contributing to the global fight against climate change whilst keeping jobs and investments in Europe. 

Transport policies are being overhauled in Europe. How do you see the role of fuels in the transport sector, given that an emphasis is regularly put on electric mobility?

Firstly, mobility – an essential asset for our economy and our very quality of life – is not delivered only by passenger cars, but also by trucks, trains, airplanes and ships.

For aviation and shipping, the alternatives to liquid fuels are limited, if practically possible, at least in the medium term. The progressive reduction of CO2 emissions is mostly achievable through blending of sustainable and “clean” biofuels, further improvement in energy efficiency (in the combination of advanced fuels and lubricants and ever more efficient engines), improvements to airplanes and ships (aerodynamics, light-weighting etc.) and  smarter traffic management.

Also for the commercial road transport, liquid fuels are very difficult to replace thanks to their superior energy density, easier transportability/storability, comparatively (pre-tax) low cost and widespread availability of infrastructures. There is a great potential, however, to further and progressively reduce CO2 emissions through the same measures as for ships and airplanes (i.e. aerodynamics and light-weighting).

The focus of the public debate on transport is, however, mainly on passenger cars and vans. Electrification of passenger transport has indeed many attractive qualities and it is   often portrayed as “the” solution, given the benefits it is said it will bring in terms of GHG emissions, air quality and a boost to economy and employment.

We should carefully analyse these claims. Are electric vehicles effectively zero emissions cars? This question should be answered firstly looking at the utilisation of the car and secondly looking at the manufacturing of the car and the batteries.
Focusing to the CO2 released during the utilization phase of the vehicle (equal to zero in an electric vehicle) gives only a partial view and may lead to the wrong conclusions.

An electric vehicle is only as “clean“ as the way its electricity has been produced. If the power generation is nuclear or renewable, the carbon footprint is indeed very limited. But if electricity is produced, as is generally the case in the EU, through a combination of coal, gas, nuclear and renewables, the “well-to wheel” comparison of diesel or gasoline cars with electric vehicles is much more balanced.

If, in addition, we include in the calculation, the CO2 emitted during the manufacturing and the disposal of the vehicle, we see that the electric vehicle is very “CO2 intensive” in its manufacture, especially with regard to the production of batteries. Indeed, it starts its life (“zero km”) with a significant burden in terms of CO2 in comparison to conventional cars. In fact, up to about 60000 km of the life of a vehicle, the cumulative emissions of CO2 from a conventional car are lower than those from an electric car. And this conclusion is even more striking if the electricity is mainly generated from coal, or if the battery needs to be replaced during the lifetime of the electric vehicle..

In terms of the impact on the economy of a widespread adoption of electromobility, we should not forget to consider the huge investments needed to build the generation, distribution and recharging infrastructures. The fiscal balance for Member States (benefitting today from very significant revenue flows from the excise duties on diesel and gasoline) should also be considered: will the electricity used in transport be taxed at a comparable level to petroleum fuels? If not, what will replace the lost fiscal revenues in the Member State’s budget?

In summary, in an unbiased approach, the comparison between internal combustion energy and electric vehicles the benefits and disadvantages associated to the two competing technologies deserve much more careful attention.

Does the European refining and fuel industry manage to tap into innovation given the difficult economic environment – e.g. energy companies pulling out of production, low oil prices, displacing of refining outside of the EU?

If the conditions (as mentioned above) are right for the EU refining industry to plan its future evolution and invest in our continent, there is no doubt that “innovation” will be the key word.

We should not forget that, according to a finding of the EU Commission in 2013, the EU refining industry ranked number1among all industries in terms of process innovation, and number 2 in terms of the level of education of its workforce.
 
Our refineries lead the world in technology and, in combination with other industries, in the supply chain, contribute to the European technological excellence in many fields.

FuelsEurope has run a project aimed at listening to the voice of the “Young Refiners”. We have produced videos in Greece, Belgium, Poland, Slovakia and Denmark, where young colleagues tell their story: their studies, their expectations, their choice of the refining industry and what they think of their work. The resulting picture is striking: young scientists, engineers and “blue collar” workers all express pride for belonging to a highly technological industry. An industry where they can use what they learned at school and continue to improve their know-how. And they are happy to have found the possibility to fulfill their expectations in the EU.   

Questions by Lyudmila Zlateva

The interview was first published in Bulgarian in the May 2017 issue of Utilities magazine.